Bookkeeping is the act of recording all financial transactions. Businesses enter every transaction into the books to avoid issues with the authorities and to know their own exact financial condition. For any business, bookkeeping is essential and a must for survival.
The real estate industry is an integral part of any economy. It comprises businesses of all sizes and makes up a significant percentage of the total workforce. Like any other business, it is crucial for real estate companies to maintain their books of accounts properly.
Bookkeeping is a difficult task, and only best practices should be followed while performing it. Let’s focus on the best bookkeeping practices for the real estate industry in the current day.
1. Hire an Experienced Bookkeeper
Hiring an experienced bookkeeper may sound like an obvious choice, but not everyone does it. Bookkeepers are thorough professionals and know their craft well. However, the real estate industry has its own finer accounting details.
Your bookkeeper must be aware of the financial standards and common practices in the industry. Ideally, you hire an experienced bookkeeper who has previously worked in real estate.
Otherwise, ensure that your bookkeeper learns about real estate accounting practices before they start working for you.
2. Clear Communication
Clear communication is the key to success for any business entity. Communication, both internal and external, should be crystal clear to avoid ambiguities. A bookkeeper knows a lot about the functions of the business due to the nature of the job.
However, real estate is a complicated business, and there can be some confusion along the way. It is a good idea to clear any confusion before they become a problem. It would be best to keep your bookkeeper onboard about the business plans to avoid any issues.
3. Keep Your Accounts Separate
Some small real estate businesses make the mistake of using the same account for the owner’s personal expenses and business expenses. People often lose track of expenditures and either spend money out of their pocket or take business money for private spending.
Always have separate personal and business bank accounts. Also, keep different debit and credit cards and make payments through them to avoid any confusion. Also, reconcile your accounts frequently. There are always some minor issues, and resolving them immediately helps you avoid future headaches.
4. Classifying the Income Correctly
A real estate business can have multiple income streams. The company may be involved in renting properties out, selling them for commission, or constructing and selling them.
All of these incomes may have a different impact on the books, and it must be ensured that they are correctly classified for tax purposes. A mistake can lead to financial penalties in the case of a tax audit. It can also mean that you may end up paying more in taxes than you owe.
5. Missing Expenditures
Any business has thousands of expenditures each year. These expenditures may be as low as a couple of dollars to as high as several thousand dollars or more. Many small businesses make the mistake of ensuring that they login the more significant transactions right away. However, they are not as efficient as treating smaller transactions.
A few dollars here and there may not feel like a lot, but these expenses can accumulate over a while and end up in thousands of dollars each year. Since these expenditures are tax-deductible, you may end up paying more in taxes than you should.
6. Classifying Employees
Real estate businesses have different kinds of employees. They have different functions and work in various capacities. Some are classified as full-time, while others may be working part-time. There may even be consultants working with the company on a contractual basis.
It would be best if you classified all the personnel correctly. Improper classification can lead to wrong tax calculations. Some real estate businesses carry such practices on purpose to save taxes. This can lead to severe penalties by the tax department in case an audit is carried out.
7. Ensure Backups
All kinds of business data are crucial. The books of accounts have all the pertinent information about the finances of the company. Without this information, the business will likely cease to exist.
Keeping backups is critical. You can keep backups in soft copies such as CDs and DVDs. It is also not a bad idea to benefit from cloud storage. Following old school, you can also have physical printed copies of the records.
Ideally, both soft copies and hard copies should be maintained. The backups should be stored away from the central business location to keep them out of harm’s way in case of a fire or a natural disaster.
8. Create Reserve for Taxes
You have to pay taxes at the end of each financial year. It would be best if you accounted for them promptly. The tax rates vary in different countries for the real estate industry.
However, corporate taxes tend to take a significant part of the profits. So creating a reserve for taxes can help the company avoid a sudden burden on its finances. If the taxes are less than the reserve, you can utilize the funds for other purposes later on.
Following the basic principles of bookkeeping helps a business prosper in the longer run. Many real estate businesses make minor errors that lead to financial losses and penalties from the tax authorities.
If you follow the steps mentioned earlier, you will likely commit a minimal error, and none of them will be catastrophic. So be sure to take the bookkeeping business seriously and ensure it is done correctly.